Letter for Waiver of Shareholders’ Pre-Emptive Rights

Preemptive rights provide shareholders an opportunity to buy additional shares of the company in the future before they are offered to new investors.

A letter for waiver of shareholders’ preemptive rights ensures that preemptive rights have been forfeited by an existing shareholder.

This assures the new investors they will be able to purchase the shares about to be issued.

Shareholders often benefit from pre-emption rights, which grant them the first refusal when new shares are issued by the company. When shareholders possess pre-emption rights, they hold an advantage over other potential investors when new shares are initially offered to them.

This implies that new shares cannot be offered to others without being extended to the existing shareholders. Whenever a company issues new shares, it must ascertain whether pre-emptive rights are in place.

Shares are typically offered in proportion to their current shareholding.

For instance, if a shareholder owns 25% of the shares currently issued, they are entitled to a first refusal right over 25% of any new shares being issued.

When an existing shareholder opts to acquire these rights, they can maintain their percentage shareholding within the company. This article explores pre-emptive rights, their types, benefits, and other associated concepts.

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Example of pre-emptive rights

Consider a company’s Initial Public Offering consisting of 1000 shares. An individual purchases 100 of these shares, equating to a 10% equity interest. Subsequently, the company offers an additional 5000 shares.

A shareholder with pre-emptive rights can purchase a sufficient number of shares to protect their 10% equity stake in the company. Assuming the issues are priced similarly, this would mean acquiring 500 shares.

Types of pre-emptive rights

Pre-emptive rights in a contract can take one of two forms: the weighted average provision or the ratchet-based provision.

How can pre-emption rights arise?

Pre-emption rights can originate from three sources: